Sanctions will damage Russia if not lifted quickly

Wednesday

Jul 30, 2014 at 2:00 PM

U.S. and European sanctions against Russia's energy and finance sectors are strong enough to cause deep, long-lasting damage within months unless Moscow persuades the West to repeal them by withdrawing support for Ukrainian insurgents.

The Associated Press

MOSCOW — U.S. and European sanctions against Russia's energy and finance sectors are strong enough to cause deep, long-lasting damage within months unless Moscow persuades the West to repeal them by withdrawing support for Ukrainian insurgents.

The U.S. and European Union released details Wednesday of new sanctions aimed at hurting Russia's economy without doing undue damage to their own trade interests, punishment for alleged Russian support for Ukrainian rebels and Russia's annexation of the Ukrainian peninsula of Crimea.

The sanctions go further than earlier penalties — which had largely targeted individuals — by broadly limiting the trade of weapons and of technology that can be used in the oil and military industries. The EU also put its capital markets off-limits to Russian state-owned banks.

Experts said the sanctions wouldn't have a tremendous impact in the short term, but if left in place for months will stifle development in the Russian economy and sap its financial sector. Already, economists have revised downward their predictions for Russian growth this year, with some saying the country will go into recession.

The biggest immediate impact is likely to come from the financial sanctions. U.S. officials said roughly 30 percent of Russia's banking sector assets would now be constrained by sanctions.

In a first sign of concern, Russia's central bank said Wednesday that it would support banks targeted by the penalties.

"State-owned banks are the core of the Russian banking system," said Vladimir Tikhomirov, chief economist at financial services group BCS. He noted the banks are already having trouble raising money. "That would mean their ability to lend to other banks, smaller banks, is going to be more restricted also."

Last year, about a third of the bonds issued by Russia's majority state-owned banks — 7.5 billion euros ($10 billion) — were placed in EU financial markets, according to EU officials.

The measures against Russian banks, which exempt short-term borrowing, are meant to inflict just enough pain without causing them to collapse.

"The aim is not to destroy these banks," said a senior EU official, briefing reporters on condition of anonymity prior to the sanctions' official announcement. "We do not want them to get into a liquidity crisis."

Russia's foreign ministry complained vocally about the sanctions, criticizing the U.S. for "advancing baseless claims" about its role in Ukraine in a "pretentious, prosecutorial manner." It criticized the EU for allowing its policy to be "dictated by Washington."

The key will be how long the sanctions stay in place.

In the short term, Russia has low public debt and enough money to support its banks. The lenders themselves have large reserves.

In the longer term, the sanctions could hurt by fostering a climate of uncertainty — something investors loathe. Some foreign investors are likely to stay away from the sanctioned companies.

Here's a look at the sanctions and their potential impact.

FINANCIAL SANCTIONS

The sanctions prohibit the sale of bonds and shares on EU market by banks that are controlled by the Russian government. No EU firms will be allowed to help those banks in placing debt on international financial markets, and EU investors will also be barred from buying such bonds or shares on all markets.

The state-owned banks last year issued 7.5 billion euros ($10 billion) in debt with a maturity of over 90 days on Europe's market, according to EU officials who briefed reporters in Brussels on condition of anonymity because they weren't authorized to release details pending a formal announcement Thursday.

ARMS EMBARGO

Exports and imports of weaponry and other military goods to and from Russia will be banned.

Once again, Russian will be hit harder than Europe. Russian exports of arms and military equipment to the EU is worth some 3.2 billion euros annually, while Europe's exports to Russia are worth only about 300 million euros, according to EU figures.

OIL TECHNOLOGY SANCTIONS

The EU sanctions prohibit the exports of certain oil exploration equipment to hamper the long-term development of Russia's oil industry.

The sanctions target equipment or services used for deep sea drilling, Arctic drilling and shale oil exploitation. EU exports of those technologies to Russia total 150 million euros, or about one tenth of the overall sales of energy technology goods to Russia, according to EU officials.

Exports to Russia of goods that could be used for such oil projects will require prior approval by the EU member states' national export control authorities.

DUAL USE GOODS

The EU is also forbidding the export to the Russian military of so-called dual use goods — those that can be used for military or civilian purposes.

Such goods can include, for example, chemicals that could also be used in the production or use of chemical, biological or nuclear weapons.

The EU's total export to Russia of dual use goods last year totaled about 20 billion euros, but EU officials cautioned only "a fraction of that" will be affected by the sanctions since the bulk of exports is for civilian purposes.

ASSET FREEZES AND TRAVEL BANS

The EU has already imposed asset freezes and travel bans on almost 100 Russian officials or pro-Russian Ukrainians held responsible for the annexation of the Crimean Peninsula or the destabilization of eastern Ukraine.

In addition, 23 companies and institutions were also sanctioned. The bloc was expected to release the names of more sanctioned individuals, including four considered close to Russian President Vladimir Putin.

The EU on Wednesday also broadened its sanctions to limit trade and investment in Crimea, banning new investment in the transport, telecommunications and, crucially, the energy sector "and the exploitation of oil, gas and minerals." Exports of key equipment for those sectors to Crimea are also banned.

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